Newcastle Building Society has become the latest lender to pull out of the
interest-only mortgage market.

Newcastle, the country's tenth largest building society, has said that those on current deals or with applications made before December 14 will be unaffected. However, those who wish to borrow more money will only be able to do so on a capital and interest basis.

Last month, Royal Bank of Scotland and Coventry Building Society became the latest lenders to rein back on this type of loan. The Co-operative Bank and Nationwide have also recently announced they will no longer be offering these deals to new customers.

Buyers with an interest-only mortgage do not pay back any of the loan they have borrowed, only the interest on it, as part of their monthly payments. As a result, at the end of the mortgage term the buyer still owes the total amount that he or she borrowed. These loans were popular during the 1990s and early noughties, peaking at a third of all mortgage sales in 2007.

However, many who took out interest-only mortgages counted on endowment savings plans to pay off the capital at the end of the term, but many of these investments have not performed well enough to produce the sum needed to pay off the mortgage.

The Financial Services Authority (FSA) recently described borrowers with existing interest-only mortgages and no way of paying them as a 'ticking time bomb'.

The regulator will introduce new rules in 2014 which will require lenders to determine how the borrower will repay interest-only loans at the end of the period. It estimates that 40pc of outstanding mortgages across the country are interest-only with 1.3 million interest-only loans worth £111 billion due to be paid in the next nine years.